Investment Highlights

• We maintain our HOLD recommendation on Malaysian Pacific Industries (MPI) with unchanged forecasts and fair value of RM13.11/share. Our fair value is pegged to a CY18F PE of 13x, in line with the average of the semiconductor manufacturing sector.

• We came away from MPI's 1QFY18 analyst briefing feeling reassured that earnings would pick up in 2HFY18. This is to be driven by: 1. Several new product introductions (NPIs) over the past three quarters, which are expected to translate into new job wins; 2. Larger orders from automotive and copper clip-related customers as their supply constraints on wafer moderate; 3. Greater demand for Dynacraft's lead frames as customers lock in supply markedly ahead of time due to a shortage in the market.

• Overall, management has indicated that 2QFY18 is looking positive and expects decent growth on a QoQ basis.

• MPI has embarked on a portfolio transformation initiative to improve profit margins going forward. To this end, the group will weed out legacy businesses that command low margins, especially in the PC/notebook and consumer/communications segments, while placing emphasis on where it excels — automotive and sensor-related products. Management targets a 50% contribution from the automotive segment in 3-4 years.

• The group continues to look for M&A opportunities to enhance manufacturing capabilities and patents related to sensor products, among others. We understand that automotive and sensor products command double-digit gross margin, consistent with the group's objective to improve profitability.

• In addition, the group plans to invest in automated equipment to replace labour in manufacturing processes in a bid to beef up product quality and operational efficiencies. Management expects implementation to be gradual commencing 2018. In our view, this would strengthen MPI’s position in securing new jobs as the enhanced facilities should provide customers with confidence.

• Management has not provided budget guidance for potential acquisitions and the purchase of automated equipment. However, we note that MPI's net cash position stood at RM542mil as of 30 Sep 2017, which gives the company the financial wherewithal to pursue the initiatives.

• In spite of MPI's bright prospects, we believe the company is fairly valued at this price. MPI is currently trading at a CY18F PE of 13.5x, while the average of the semiconductor manufacturing sector is 13x.

Source: AmInvest Research - 10 Nov 2017